Aaron’s, Inc. (NYSE:AAN) reported its second quarter financial results towards the end of the last week. The furniture retailer beat the consensus expectations, as it reported earnings of $0.61 per share for the quarter, exceeding the Street’s expectations by 35%. The Atlanta-based retailer also posted revenue of $769 million, exceeding the Street’s expectations by $4 million. During the same period in 2014, the company reported net earnings of $0.37 per share on revenue of $662.5 million. Aaron’s, Inc. (NYSE:AAN) also raised it fiscal year 2015 guidance for earnings to a range of between $2.15 and $2.35 per share, a range which was previously between $2.01 and $2.21 per share. The Street’s consensus EPS for FY 2015 is $2.15. “Our core business achieved an increase in profit margin due to improved expense and inventory control,” Aaron’s, Inc. (NYSE:AAN) CEO John Robinson was quoted as saying during the conference call. One major concern in the earnings was that Aaron’s core sales and lease ownership revenues dropped by 3.9% year-over-year to $496.7 million and that the HomeSmart division’s revenues plunged by 3.1% year-over-year to $15.5 million. Robinson acknowledged that the core revenues were weaker in the quarter, but that the cost cuts enabled the earnings beat. Aaron’s, Inc. (NYSE:AAN)’s shares gained around 1% in the pre-market on Friday, but soon after, the stock started dropping in value, closing at 6.6% below their closing price on Thursday. Does this recommend a good buying opportunity, or is it buyer beware?
At the end of the first quarter, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in Aaron’s, Inc. (NYSE:AAN) with a total investment of $250.3 million, which was around $327.3 million held by 23 hedge funds at the end of 2014. The stock dropped by about 7.8% during the January – March period, whereas the hedge funds’ holdings in the stock dropped by 23% during the same period. Despite the increasing number of hedge funds with long positions in the stock, overall the hedge funds reduced their investment in the stock greatly, displaying their bearish sentiment towards it.
Most investors don’t understand hedge funds and indicators that are based on hedge fund and insider activity. They ignore hedge funds because of their recent poor performance in the long-running bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns enjoyed (or not) by investors. We uncovered through extensive research that hedge funds’ long positions in small-cap stocks actually greatly outperformed the market from 1999 to 2012, and built a system around this. The 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 80 percentage points since the end of August 2012 when this system went live, returning a cumulative 139.7% vs. 58.7% for the S&P 500 Index (read the details).
Likewise, other research (not our own) has shown insider purchases are also effective piggybacking methods for investors that can lead to greater returns. That’s why we believe investors should pay attention to what hedge funds and insiders are buying and keep them apprised of this information. Looking at Aaron’s, Inc. (NYSE:AAN), Directors David Kolb and Kathy Betty purchased 376 shares and 465 shares respectively during the first half of 2015. On the contrary, Senior Group Vice President at Aaron’s, Inc. (NYSE:AAN), James Cates sold around 9,385 shares during the same period.
Keeping this in mind, let’s take a look at the latest hedge fund action encompassing Aaron’s, Inc. (NYSE:AAN).
Hedge fund activity in Aaron’s, Inc. (NYSE:AAN)
According to Insider Monkey’s hedge fund database, First Pacific Advisors LLC, managed by Robert Rodriguez and Steven Romick, holds the most valuable position in Aaron’s, Inc. (NYSE:AAN). First Pacific Advisors LLC has around 1.7 million shares valued at $48.8 million, comprising 0.4% of its 13F portfolio at the end of March. The second-largest stake was held by Diamond Hill Capital, led by Ric Dillon, which held around 1.5 million shares valued at $41.7 million; the fund had 0.3% of its 13F portfolio invested in the stock. Remaining peers with similar optimism contain David E. Shaw’s D E Shaw, Jacob Doft’s Highline Capital Management, and Malcolm Fairbairn’s Ascend Capital.
As the stats suggest, some hedge fund managers opted to open fresh positions in the stock, whereas a few hedge funds either walked out of or decreased their positions in the stock. Renaissance Technologies, managed by Jim Simons, created the most valuable new position in Aaron’s, Inc. (NYSE:AAN), purchasing around 158,000 shares of the company during the first three months of the year. But, Alexander Mitchell’s Scopus Asset Management opted to walk out of the stock by selling all of its 656,400 shares during the same period. Also, Steve Cohen’s Point72 Asset Management held 854,000 shares by the end of March, which was well down from the 2.5 million shares held at the end of 2014. This is a significant back step by Cohen on the stock.
Many hedge fund managers like Steve Cohen and Alexander Mitchell were bearish on the stock, as they sold large positions in it during the first quarter, but leading hedge fund managers like Jim Simons opted to open fresh positions in the stock. Hedge fund activity on the stock during the second quarter might give more insights about the hedge fund sentiment for the stock. But considering the hedge funds’ bearish activities on the stock, and the market sentiment to the company’s latest earnings report, we don’t recommend buy the stock at the moment.
Disclosure: None
